Tuesday, September 26, 2006

Prospects for black gold putting Cuba in suitors' sights

HAVANA, Cuba - Known more for cigars and rum than oil rigs, this socialist nation has become the latest country drawn into the frenzied hunt for oil, hoping that a gusher in its Caribbean fields will ease its energy dependence and kick-start its economy.

After years of boasting about its energy potential but seeing few results, Cuban authorities received good news last year when the U.S. Geological Survey estimated Cuba's northern offshore basin contains 4.6 billion barrels of oil and 9.8 trillion cubic feet of natural gas.

The amount of oil is roughly half the estimated reserves in the Arctic National Wildlife Refuge, which President Bush wants to open for drilling, and could provide Cuba daily production of about 300,000 barrels.

"Cuba is not Saudi Arabia or Venezuela, but it could become a major oil and gas player in the region," said Jorge Pinon, former president of Amoco Oil in Latin America and now a senior research associate at the University of Miami.

Already, oil companies from Canada, Spain, Norway, Malaysia and India have signed agreements with Cuba's state-owned company, CUPET, to begin exploring in Cuban waters more than 6,000 feet deep.

Earlier this month, India's state-run petroleum company raised its stake in Cuba's oil sweepstakes by signing a deal to join CUPET in exploring a 1,660-square-mile area off Cuba's northwestern coast.

R.S. Butola, a top Indian oil executive, said geological studies of the area are promising. The initial exploration is expected to last several years and cost tens of millions of dollars.

Bringing a deep-water oil well on line would take many more years and cost $1 billion or more.

"It's a question of prospecting and doing a lot of work," said Butola, managing director of ONGC Videsh, the overseas arm of India's state-owned oil company.

Venezuela's state-run oil giant, Petroleos de Venezuela, along with Brazilian and Chinese companies, also are interested in exploring for high-quality crude in Cuba's 43,250-square-mile offshore zone.

American oil corporations are barred from participating because of U.S. trade sanctions against the island. The sanctions also would prohibit the United States from importing Cuban oil.

Embargo opponents and oil industry insiders argue that the United States should grant an exemption to American petroleum companies, much like the law already allows for U.S. agricultural and medical exports to Cuba.

"We need all of the increased crude oil and natural gas that we can get our hands on," said Charles Drevna, executive vice president of the Washington-based National Petrochemical & Refiners Association.

"It makes both economic and national security sense to develop those resources either in our own waters or as close to our own waters as possible," Drevna said.

The hope of a major strike in Cuban waters was buttressed this month by the announcement that as much as 15 billion barrels of oil was discovered in ultra-deep waters northwest of Cuba in the Gulf of Mexico. It could be the largest U.S. oil discovery in decades.

"There has to be oil," Jose Luis Rodriguez, Cuba's minister of economy and planning, said last week. "The form of the structures in the Caribbean basin, in Cuba's waters, have the same structure as the oil fields in the Gulf of Mexico, as much for the Mexican part" as the U.S. part.

In February, executives from ExxonMobil Corp. and other American corporations met with Cuban officials in Mexico City to discuss oil exploration in Cuba's gulf waters, which extend to within 50 miles of the Florida coast.

But the meeting was disrupted after an American-owned hotel expelled the Cuban officials under pressure from the U.S. Treasury Department, which argued that housing the Cubans violated the U.S. trade embargo against the island.

Cuban and Mexican authorities reacted with anger to the expulsions and accused Washington of interfering in other countries' internal affairs.

One Cuban official who took part in the meeting was Manuel Marrero, senior petroleum adviser at Cuba's Ministry of Basic Industry. He said that only 16 of Cuba's 59 offshore oil blocks have been auctioned, leaving plenty of opportunity for U.S. companies.

"We have 43 more blocks available for negotiation," Marrero said. "We know U.S. companies are considering it. The ball is in the U.S. court."

So far, American multinationals haven't thrown their weight behind the Cuba effort because the potential amount of oil at stake, while impressive, is not yet worth the political battle and financial risk, experts say.

Instead, American executives are focused on getting legislation passed that would open millions of acres to oil and gas drilling in U.S. territorial waters.

The U.S. House and Senate recently approved separate bills to ease drilling restrictions in the Gulf of Mexico and other offshore areas despite opposition from environmental groups. It is uncertain whether a compromise can be reached before the end of the legislative session.

President Bush and influential Cuban-American legislators oppose U.S. participation in oil exploration in Cuban waters, because, they argue, it would strengthen the island's authoritarian government.

Rep. Jeff Flake, an Arizona Republican who introduced a bill in May allowing U.S. companies to bid on oil exploration leases in Cuban waters, said the political climate in Washington could change if Democrats score big gains in upcoming congressional elections.

A strong opponent of the embargo, Flake said Democrats generally have been more supportive than Republicans toward easing U.S. travel and trade restrictions to Cuba.

Analysts say a major discovery that turns Cuba into an oil exporter also could spur American business groups to lobby for a change in policy.

"Most U.S. companies don't care about Cuba because it doesn't have money to buy American products," said one Havana-based diplomat who asked not to be identified. "If they could buy the products, the pressure (that) industry would exert would be far more than the pressure in Miami to keep the embargo. The U.S. embargo would go away very quickly."

Energy has long been an Achilles' heel for Cuba.

After the 1959 Cuban Revolution, the Soviet Union provided discounted oil to the island nation as part of a huge assistance program. The Soviet Union's collapse in 1991 ended the fuel shipments and sent the Cuban economy into a tailspin as bicycles replaced cars and blackouts plagued the nation.

To ease the crisis, Cuba opened the oil sector to foreign investment in 1999. Since then, Sherritt International Corp. and a second Canadian company have helped the island's oil production increase to about 70,000 barrels a day.

But that amount covers less than half of Cuba's daily consumption, and the poor quality oil retrieved beneath shallow waters is expensive and difficult to refine, diplomats and analysts say.

Cuba gets about 98,000 barrels of high-quality discounted crude a day from Venezuela. Cuban authorities believe even a modest strike could ease the island's energy dependence and chronic economic woes.

"I am 100 percent convinced that in the next five or six years, Cuba will be developing its deep-water sector," Marrero said. "We can expect big results."

The efforts up to now have been inconclusive.

In 2004, the Spanish company Repsol YPF spent an estimated $50 million drilling a test well 18 miles off Cuba's northern coast. Company officials said they discovered high-quality oil but not in an amount that was commercially viable.

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